Taiwanese Lifers: New regulations should not dent the quest for overseas investment

Taiwan's Financial Supervisory Commission (FSC) rolled out a preview of the updated “ Regulations Governing Foreign Investments by Insurance Companies ” in August 2018 . This has raised concerns in the market on the foreign investment cap that it could r e in in Taiwan ese lifers ’ overseas investment strategies. In this note, we argue that the new quota on overseas investment is set in a way that might not necessarily limit the purchases of foreign assets as much as one could expect at the first sight . And there are two key reasons. First, the new regulation states the sum of (i) the granted quota (set by regulators on an individual basis but generally hovering around 40%- 45%) and (ii) Formosa bond investment cannot exceed 145% of the granted quota. However, such limit also depends on lifers ’ liability structure and, in particular, the share of foreign currency policies . In fact, the limit to issue foreign currency policies is eased from 25% of total reserves to 35%. This means lifers can, in principle, invest more than 65.25% of their capital if they issue more foreign currency policies. Among the seven largest Taiwanese lifers, we estimate that NTD 1,705 billion (or USD 56 billion) is available for overseas investment based on the maximum issuance of foreign currency policies. Second, the above regulation ha s opened the door to new types of foreign investment. T here is a relaxation on sovereign credit beyond the OECD countries as well as at the sub-government level. T he limit for private equity is also expanded. Our reading is that it will be easier for lifers to generate higher return from (quasi) sovereign related foreign assets. Whether such move will come with more risk for lifers will depend on their asset reallocation strategies as they could also move away from corpora te credit, of which the bar had also been eased in another regulatory revamp in 2017 . W e believe Taiwan’s new regulation on l ifers might be more welcome tha n it could look at first sight. I t is a positive step towards migrating FX and foreign credit risks away from lifers (passing part of the risks to investors but with an overall limit on foreign risk). However, this does not necessarily imply that Taiwanese lifers will need to reduce their foreign exposure as they will have more opportunities, especially on the sovereign and quasi-sovereign space. This is in line with the recent speech by the c entral b ank governor, Chin-Long Yang, that outward foreign investment is good for Taiwan. Still, down the road, if the external environment gets complicated as concerns over lifers’ profitability (or even solvency), the regulator could toughen the stil l very accommodative regulation for foreign investment.